Management Accounting

Vendors Squeeze Circuit City

Some sellers have set more restrictive payment terms than in previous quarters, including requiring payment before shipment.
Stephen TaubNovember 3, 2008

Following the release of its second quarter results, Circuit City’s liquidity position and the sharply worsened overall economic environment led some of its vendors to take “restrictive actions” involving the payment terms and credit they make available to the company, the electronics retailer announced today.

The current financial crisis has hit certain of Circuit City’s vendors with “insurmountable challenges” in obtaining credit insurance for the company’s purchases. As a result of this and other considerations, some vendors have set more restrictive payment terms than in previous quarters, including, in some cases, requiring payment before shipment, the company noted.

It also said that vendors have limited the credit available to the company for purchases, including, in some cases, not providing customary increases in credit lines for holiday purchases.

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”While management is working diligently to secure the support of its vendors and believes it has maintained good relationships with these important partners, the current mix of terms and credit availability is becoming unmanageable for the company,” Circuit City added in its announcement.

To add insult to injury, Circuit City has been unable to collect an income tax refund of about $80 million that the company believes it is owed from the federal government, the retailer also lamented.

The company also announced on Monday that it would close 155 stores. Posting a 13.3 percent decline in same-store sales, the company is attempting to curb future store openings and aggressively renegotiate certain leases.

Mostly because of the weakened economic environment and its potential effect on the timing the company’s inventory sales and the associated costs of such sales, a recent third-party appraisal of the company’s asset-based credit facility found that the estimated net orderly liquidation value of the company’s inventory had been reduced. The reduction has spawned a decrease in the company’s borrowing base, according to Circuit City.